All agree: 2007 has to be a super year ::

Author: David Potts
Date: 17/01/2007
Words: 1620
Source: AFR
Publication: The Financial Review
Section: Portfolio
Page: 41

Financial experts aim to take advantage of the Howard government's 'gift to the rich', writes David Potts.

A lending hand might be needed, but the most popular new year's resolution among financial experts is to put $1 million into superannuation by June 30.

"It's almost a gift to the rich," says Tom Murphy, director of private wealth management at Deutsche Bank, of the new super rules, which remove the tax on pay-outs after 60 and allow those working to put up to $1 million into their funds before June 30.

After that, the annual limit for after-tax contributions becomes $150,000, or $450,000 in one hit over three years if you're under 65. Some of Murphy's clients are even borrowing the $1 million to put into their super funds, even though the interest isn't tax deductible.

"The numbers add up," says Murphy, not that he recommends it.

It's not hard to see how a borrowing strategy could pay off. Over time a balanced fund can expect to earn about 10 per cent a year. The cost of the loan would be the interest of about 7.5 per cent, while dividend franking credits could wipe out the tax on the returns, and the capital gains tax rate is only 10 per cent.

"Broadly, if you can achieve an after-tax investment return of greater than the [non-deductible] interest rate it would make sense," says Andrew Lowe, manager technical services at ING Australia.

If you start a self-managed super fund with a borrowed $1 million and the income grows by 3 per cent a year and capital gains by 5 per cent, Lowe calculates the amount would double in 10 years. Repaying the $1 million loan leaves $1,113,107 million in your fund.

But Lowe also found another strategy worthwhile. It could be better forgetting the loan and contributing the equivalent of the interest - in this case $75,000 a year - that you would have paid instead. Then the fund would grow to $1,158,109 after 10 years.

As well as being $45,000 better off, it would be a lot less risky.

Although Lowe wants to eliminate his debts, he is going to increase his salary-sacrificed contributions to super for the next four years. Murphy, who also won't be borrowing, says he's making his DIY super fund the "vehicle of choice" for all his investments.

Although there is scepticism about whether this or a future government will stick with the super changes - 65 per cent replying to a survey by the Association of Superannuation Funds of Australia said they didn't think it would - Murphy begs to differ.

"I think future changes to super will be for the better, not worse," he says, pointing to the government's incentive to have as many self-funded retirees as possible.

His general message for investors in 2007 is: "Don't allow the excitement of a buoyant sharemarket to lead into higher and higher levels of underlying gearing." Note the "underlying" bit. That includes property trusts and infrastructure funds, which have their own internal borrowing.

Murphy also says an essential financial resolution is to rebalance your portfolio.

This forces you to take profits and buy bargains because it means bringing a stock's weight back to its original weighting. So a share that has risen in value will represent a bigger proportion of a portfolio, in which case some of the holding is sold to bring it back to where it was proportionately.

Hans Kunnen, head of investments market research at Colonial First State, agrees "this has to be the super year". He doesn't have the $1 million to put in, so "I'll probably have to take some capital gains from shares to make a personal contribution".

But it won't be because the sharemarket has peaked.

"It'll be a good year for international and domestic shares, but not stellar," he says, while listed property trusts have probably peaked after three exceptional years. "I'm not convinced they can maintain this performance, but . . . they won't be bad."

Futurologist Phil Ruthven, executive chairman of IBIS Group, says it's too hard to beat super.

But rather than pick winners, he suggests a good resolution is just to track the All Ordinaries Index. Over a 15-year period you'll get about 11 per cent a year that way, he says.

His own resolution? To work no more than 30 hours a week.

Anton Tagliaferro, investment director of boutique fund manager Investors Mutual, says he'll "see if I can rustle up the money to put into super and my spouse's super before the end of June".

If anything he's cashed up, looking "for the right companies at the right price".

Nor is he "a big believer in gearing", in common with many fund managers and economists.

Peter Hall, chairman of Hunter Hall International, has resolved to "be cashed up and not get caught up in the market", which has had three or four "fantastic" years.

"I want to resist the urge to splash out," although he does want to give more to charity.

But Shane Oliver, head of investments strategy at AMP Capital Investors, says he'll be"reinvesting in the sharemarket" through managed funds and some listed property trusts, after being sidelined by the cost of home renovations.

"I've borrowed to pay for the renovations and I want to get the flow of savings back to the financial markets, mostly managed funds and some listed property trusts with a dollar for dollar gearing in the process."

BT Financial Group chief economist Chris Caton has just sold his house so will take advantage of the $1 million rule for super - "not that I have $1 million but I'm working towards that".

But it's not all super in 2007. Just mostly, if you're reasonably close to retirement with some lazy cash.

The chairman of WAM Capital, Geoff Wilson, has vowed "to buy more shares in the Wilson Investment Fund which is trading at a 20 per cent discount to its underlying assets. My June project is super, which I will top up, but I haven't worked out how yet."

Macquarie Bank's interest rate guru Rory Robertson despairs at today's asset prices, vowing "to sit on my hands until something compelling shows up and something that's not at an all-time high. It may be a long wait."

Despite an impressive track record of predicting interest rates - which, by the way, he says won't be cut until unemployment starts rising - Robertson has a very limited amount of gearing.

"I've heard people say because of the tax cuts they'll gear to the limit and, yes, it's worked a treat. One year it won't work."

Roger Montgomery, director of Clime Asset Management, wants to "buy two wonderful businesses that aren't listed at cheap prices", adding it doesn't matter which way the market goes, you will make money from a good business.

If he was over 55 he'd be putting money into super and, while working, drawing down a pension and salary sacrificing to save on tax.

Super features so prominently in the new year resolutions you might wonder what's happened to the good old mortgage.

In fact, super has become the better deal, although there's no denying that paying off the mortgage still ranks top of the list for sleeping well at night. The return might not be the highest, but the risk is the lowest of all the alternatives.

Until now financial adviser Louise Biti, head of technical services at Asteron, has concentrated on paying off the mortgage. "But given the super changes this year I will look at salary sacrificing into super and using the equity in my home for other investments," she says.

CommSec's chief equities economist, Craig James, is returning to first principles. "To get a handle on where our finances are" is his vow. "We're tilted too far toward property and not enough toward super. I won't sell the investment property but I need to even it out a bit with salary sacrificing [to super] tilted to international shares."

Margaret Lomas, financial author and founder of Destiny Financial Solutions, is also going back to basics. "My resolution is to ensure that I physically commit a set amount of time, each and every week, to examining my investment portfolio, regularly adjusting the investments I hold and adding to the portfolio each and every time the opportunity arises."

NEW YEAR RESOLUTIONS
Market expert outline their plans for 2007

Geoff Wilson
Chairman of WAM Capital

[My plan is] to buy more shares in the Wilson Investment Fund which is trading at a 20 per cent discount to its underlying assets. My June project is super, which I will top up but I haven't worked out how yet.

Tom Murphy
Director of private wealth management at Deutsche Bank

I am making my DIY super fund the vehicle of choice for all my investments.

Shane Oliver
Head of investments strategy at AMP Capital Investors

I've borrowed to pay for the renovations and I want to get the flow of savings back to the financial markets, mostly managed funds and some listed property trusts with a dollar for dollar gearing in the process.

Craig James
Chief equities economist at CommSec

My plan is to get a handle on where our finances are. We?re tilted too far toward property and not enough toward super. I won?t sell the investment property but I need to even it out a bit with salary sacrificing [to super] tilted to international shares.

Louise Biti
Head of technical services at Asteron

Given the super changes this year I will look at salary sacrificing into super and using the equity in my home for other investments.

Margaret Lomas
Author and founder of Destiny Financial Solutions

My resolution is to ensure that I physically commit a set amount of time, each and every week, to examining my investment portfolio, regularly adjusting the investments I hold and adding to the portfolio each and every time the opportunity arises.

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